Organizational Capabilities and Competitive Advantage

The Resource Based View (RBV) assumes that each firm is a collection of unique resources and capabilities that determines a firm’s strategy. In this method above average returns are earned when the firm employs its valuable rare, costly to imitate and non substitutable resources and capabilities (i.e. core competencies) to establish a competitive advantage over its rivals. It should however, be noted that such competitive advantages are not sustainable on a permanent basis. Therefore, firms must exploit their current advantages while simultaneously using their resources and capabilities to form new core competencies that can serve as relevant competitive advantages in the future (like HDFC trying to venture into banking, insurance and mutual fund industry after consolidating its positions in the housing loan market in recent times). In a competitive scenario every firm must try to build fences around its competitive advantages known as capability drivers and try to explore other areas that could help it utilize its resources to the best of its advantage.

Capability drivers in simple terms are basic economic and strategic means by which a firm builds an underlying source of competitive advantage in its market or industry. Examples of basic capability drivers include the following:

1) Patents: Firms that own patents on important technology enjoy a strong advantage over rivals especially in industries such as chemicals, pharmaceuticals etc. In early 90s Eli Lilly and Pfizer had important strategic gains in depression and blood pressure medications; Xerox Corporation had patent rights over xerographic duplicating process for a long time.
2) Licenses: The license – permit raj in 70s and 80s enabled certain firms to enjoy significant competitive advantages over rivals in the pre-liberalization era in India. That was the time when the likes of Manu Chabria, R P Goenka, Dhirubhai Ambani, Karasanbhai Patel and Venugopal Dhoot began building their empires with serpentine queues and endless waiting periods for Fiat cars and Bajaj scooters but grabbing whatever licenses the government issued from time to time.
3) Location: In some industries location could be an important source of competitive advantage like the retail outlets of public sector oil giants HPCL, BPCL, Indian Oil Corporation as against private sector oil companies such as Reliance Petroleum, Essar Oil etc.

Distribution channel: Established firms like Bata (shoes) HPCL, BPCL, IOC (oil), HLL, and Procter & Gamble (FMCG) have excellent distribution networks that help them gain customers’ attention. Shelf space in retail outlets and cut costs by spreading their costs over higher sales volumes.

Employees Motivation and skills: Experienced employees with relevant skills could be great sources of competitive strength. Infosys spends lot of money on employee training – technical, process as well as behavioral. Because of stock options even drivers have become millionaires there. Employees take pride in being the leaders in business ethics and corporate governance. Not surprisingly when every other player in the software sector is complaining about low employee motivation level and high attrition rates. Infosys has been able to hold its head high in the market place for over 20 years now.

Design skills Process Improvements:

Firms that came up with new products on a regular basis are familiar with the importance of carrying out small modifications through product redesign and process improvements (such as Hitachi, Sony, Toshiba, Sanyo etc). As soon as Sony develops a new product, it usually comes up with three teams to view the new product as if it belongs to the competitors. The first team thinks of minor improvements, the second team thinks of major improvements and the third team thinks of ways to make the product obsolete. Punjab Tractors ltd. has been able to cut down the cost of rejection / tractors through its intensive stress on quality planning and building a culture of quality improvement based upon the Juran Quality Improvements Techniques [productivity levels rose from 17 tractors per man per year to 35 tractors per year per man between 1997-2000 upgrading manufacturing process through conveyorisation, introduction of power trolleys etc.

Source: Strategic Management